Role of Strategic Compensation - Col Shujaat

8/6/2019 Role of Strategic Compensation - Col Shujaat

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Role of Strategic Compensation In Today’s Contemporary World

Introduction

1. All organizations have a compensation plan, written or unwritten, formal or

informal. For some organizations, the purpose of that plan may be merely to meet

compliance requirements. For other organizations, the goal of the compensation

plan may be to, attract qualified employees, to retain those employees, and

motivate employees to direct their efforts towards achieving the goals of the

organization. Regardless of the size and complexity of a compensation plan, there

are generally many easily identified elements to any compensation plan.

Development of A Compensation Philosophy

2. Before an organization actually develops a compensation plan, there are

several questions that need to be answered, lacking the time to consider and

answer these questions will make the both the process of developing and

administering a compensation plan much easier and will result in the development

of a compensation plan that more closely matches the organization’s goals and

objectives.

What is the goal of organization’s compensation system? In addition to attracting

and retaining qualified employees, is there an intent to reward employees for good

performance, motivate good performance, and or create reinforce a particular type

of organizational climate?

What is communication policy? How is the organization going to communicate

the compensation plan to employees once it has been developed? Is the

organization prepared to evaluate the effectiveness of any such communication? If

so, how?

How will decisions regarding pay be made? Who will be involved in these

decisions? What decisions guidelines will need to be developed?



What is the desired mix between benefits and cash? Since benefits are an

important form of compensation, how does an organization use them to maximize

the effectiveness of the compensation plan?

What is the role of performance appraisal in the organization? How important is performance appraisal and why?

How ill the organization manage change to the compensation plan once it has been

developed? How can the compensation practices reinforce other overall

management philosophies and objectives.

Objectives of a Base Pay Program

3. Before going into the details of how actually to pay people, there are many

factors that impact a base pay program that an organization must consider. In

general, every organization’s base pay program has certain objectives. The

principal ones are as follows:-

• Internal equity

• External equity (or competitiveness)

• Individual equity

• Process equity

• Performance or productivity incentives

• Maximum use of financial resources

• Compliance with laws and regulations

• Administrative efficiency.

As will be discussed in the following, all of these objectives must be balanced in

the development of a sound base pay program. As these points are being reviewed,

management should ask the following question………Is this point important to

this organization? If so, how important? ……What are the implications of this

point to the current or desired practices?



a. Internal Equity. Internal equity deals with the perceived worth of

job relative to other jobs in the organization. All employees compare

their jobs to other jobs within the organization. Generally, they

consider skill, effort, responsibility and working conditions in thecomparison in order to determine the value of their jobs relative to

other jobs. Likewise, management must often determine the “worth”

or “value” of one job in relation other jobs for the purpose of pay

programs. Maintaining appropriate pay relative to value or worth is

achieving internal equity.

b. External Equity. External equity deals with the issue of market

rates for jobs. An employer’s goal should be to pay what is

necessary to attract, retain and motivate a sufficient number of

qualified employees. This requires a base pay program that pays

competitively. Among others, internal data such as turnover rates

and exit interviews can be helpful in determining the

competitiveness of pay rates.

c. Individual Equity. Individual equity deals with how individuals

perceive how they are being paid relative to other individuals within

the organization and perhaps within the same position. This focus of

individual equity is on the merits of the person filling a job, as

opposed to the job itself.

d. Process Equity. How employees perceive the fairness or equity the

administration of the compensation system is process equity. Process

equity, in the perceptions of employees, is strongly influenced by the

openness of the system, communication of the system to employees,

participation in design or administration of the system and a

grievance appeal procedure.

Performance Incentives.



4. A significant element of a base pay program is to encourage higher or

increased levels of employee performance. Pay systems need to be designed to

improve organizational performance.

Maximum Use of Financial Resources.

5. Since an organization does not have unlimited financial resources, the base

pay program needs to be designed to maximize the value to the organization with

minimum use of these limited resources. In order to accomplish this, pay programs

have a variety of tools such as pay range maximums, pay increase budgets,

authorization procedures, compensation committees or various auditing

procedures available to help accomplish this objective.

Compliance with Laws and Regulations.

6. While not the primary objective of a pay program, one of the objectives of

pay program needs to be to keep the organization in compliance with various state

and federal laws and regulations.

Administrative Efficiency.

7. Due to the limited financial resources in an organization, one of theobjectives of a pay program should be to have a pay program that is easy to

administer, flexible, and cost effective.

Developing Rates of Pay for Jobs.

8. The basis for most pay programs is a pay structure a hierarchy of jobs with

pay range and / or rates assigned. Pay structures are designed so that the greater

the worth of a job (as determined by internal or external equity), the higher the pay

grade and range. Developing a pay structure is a process with a series of steps :-

• Job analysis

• Job documentation

• Development of a job worth hierarchy



• Labour market data collection and analysis

• Establishment of pay rates and ranges.

Job Analysis.

9. This involves collecting and evaluating relevant information about jobs. A

data collected should clarify the nature of the work being performed (principal or

essential tasks, duties and responsibilities), the level of the work being performed,

the extent and types of knowledge, skill, mental and physical effort and

requirements, and responsibility required for the work being performed, there are

five primary sources of data for collection of job information : questionnaires,

interviews, logs or diaries, direct observation and work plans. All of these methods

have advantage and disadvantages and the organization must choose the method

that will provide comprehensive data with administrative efficiency and cost

effectiveness.

Job Documentation.

10. There needs to be a formalized way to document job content. In most

organizations, a job description is the means used to accomplish this. Job

documentation is used to evaluate job content, provide objective criteria for

making pay comparisons, ensure that jobs are classified according to content as

opposed to individual personalities, effectively communicate the job duties to both

supervisors and employees, and help the organization defend itself against charges

of discrimination. Who should write job description? That will depend on the

resources available to the organization, but they should always be reviewed by line

management.

Development of a job Worth Hierarchy.

11. A job worth hierarchy is the result of job evaluation, the overall process of

comparing jobs. There are 6 major methods of comparing jobs in order to develop



the job worth hierarchy. The first three methods are “ whole – job” evaluations

and are non-quantitative in nature. These include ranking, classification and

slotting. The second three are “factor” evaluation and are quantitative in nature.

These include point factor, factor comparison, and scored questionnaires.

Labour Market Data collection and Analysis.

12. Before an organization begins the process of collecting labour market data,

it must first define its relevant labour market. This may include similar

organizations in the same labour market, all employers in the local market, similar

organizations in the regional or national market, and / or all employers in the

regional or national market. The goal of labour market data collection is to find

data from employers with whom the organization competes for employees. For

clerical employees, this may be all employers in the local labour market.

Establishment of Pay Ranges and / or Rates.

13. In order to actually establish a pay structure, an organization needs to sel

rates of pay for the jobs in the job hierarchy. Before doing this, an organization

needs to ask, and answer the following question :-How should the organization’s pay level relate to the external market? Should the

organization be a pay leader, match the market or pay less than market?

What is the organization willing to pay for : job content, seniority, performance,

sills, cost of labour, or some combination of all of these?

How does the organization pay its employees: based on a single rate structure (all

employees in the work), based on new skills skill based pay) or based on some

combination of these factors.

Pay Rates and Pay Increase.

14. Creating a pay structure is not the final step in the creation of a

compensation plan. An organization must also decide how to administer his

compensation plan. This means deciding how to pay new employees, how and



when to give employees increases, including how to move existing employees

from the minimum to the maximum of their assigned pay grades, how to

determine the pay increase for an employee being promoted from one job to

another and what influence, if any, cost of labour increase will have on thedetermination of pay increases for employees. In addition, an organization must

develop policies and procedure that ill implement the result of the these decisions

in a consistent manner.

Staring Pay for New Employees.

15. In order to avoid paying new employees the same as more experienced

employees, most employers choose to start new employees closer to the minimum

of the pay range. In general, an employee with minimum qualifications should be

paid the minimum of the range. This general rule is not true when a new hire has

skills which are in great demand or has skills or other expertise substantial above

the minimum.

Employee Increases.

16. There are several different types of base pay increases: general (across –the

board) increases, cost of living, labour increases promotion increases, step

increases (based on longevity), and merit increases.

General increases are diminishing in popularity because they are not consistent

with the idea of pay for performance. With a general increase, employees in a

certain group based on established requirements are eligible for a certain monetary

or percent increase to their base pay. A cost of living increase is a type of general

increase given to all eligible employees. This type of increase may happen as a

result of union contract negotiation. Some companies choose to track benchmark

positions over a period of time and modify other positions based on changes in the

ranges of benchmark positions.

Promotion increases are given when an employee is moved from one job to

another with a higher pay grade and range. This size of the increase will be



influenced by the difference between the old and new pay ranges, and the pay of

the newly promoted person’s peers, superiors and subordinates, if any. Step

increases can be based solely on longevity or some combination of longevity and

performance. Step increases alone are inconsistent with pay for performance.Performance Appraisal.

17. If an organization chooses to pay for performance, the compensation plan

must include a well-designed and properly administered performance appraisal

system in order to be complete. Following are some questions that will help

determine if an organization’s current performance appraisal systems meets this

criteria.

Is performance appraised on the direct measurement of an employee’s output or

result? Does the performance appraisal system consider only job-related behaviour

rather than personality traits?

Are supervisors and mangers trained in the performance appraisal process?

Are the criteria used to measure performance as objective and quantitative as

possible? Or are the criteria open to subjective interpretation?

Maintaining and Auditing a Compensation Plan.

18. Changes in the external market or internally within the organization can

cause one or more parts of compensation plan to become outdated. Part of the

challenge in creating a compensation plan to build in mechanisms that facilitate

change when necessary, yet maintain control on a regular basis. Some actions or

organization can take to maintain an updated compensation plan include regular

review of job descriptions, monitoring of compensation levels versus companies

with which there is competition for employees, and regular review of the pay

structure including pay ranges and pay increase budgets.

An audit is an excellent means to ensure that a compensation plan is being

properly administered and maintained. When planning to audit a compensation

plan, an organization needs to consider the following :-



a. Process Measures. Are procedures and practices in place to ensure the

compensation plan is being administered smoothly and efficiently?

b. Policy Compliance. Are there procedures or other mechanisms in

place to ensure that the compensation plan is being administered inaccordance with policy?

c. Documentation Adequacy. Is there adequate documentation in place

to ensure that the administration of the compensation plan and

compliance issues can be audited?

d. Overall Results. Are there measures that can assess how ell the

compensation plan is achieving its goals and objectives?

Conclusion.

19. After reviewing audit results, management can make recommendations on

any improvements that may be necessary, allocate the necessary resources and

follow up to make sure the work is completed.

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Role of Strategic Compensation - Col Shujaat